Consumption, Saving, and Investment in Economics

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C
ONSUMPTION
 
AND
 I
NVESTMENT
 
Aditi Arora
Assistant Professor
 
C
ONSUMPTION
 
In macro economics, the total spending by all
individuals, firms, institutions, etc. on consumer
goods and services is called consumption.
Strictly speaking consumption should apply only to
those goods and services that are totally used, enjoyed
or eaten up within the reference period.
However, the convention is to include under
consumption the expenditures on short life consumer
durables such as furniture, television etc.(and even
automobiles but not houses).
 
C
ONSUMPTION
 F
UNCTION
 
Consumption Function is the schedule giving the
relationship between consumption and disposable
income.
Disposable Income: In the case of an individual it is
the income left with him after paying taxes and
defraying his prior commitments.ie. The portion that
he is free to spend on items of his(fresh) choice. But in
the case of estimation of Disposable Income at macro
level, taxes and other such inter sectoral transfer
payments are not taken into reckoning.
 
E
NGLE
S
 L
AW
 
Engle’s law is that the proportion of amount
spent on food and other necessities decreases as
the level of disposable income increases.
Marginal Propensity to Consume: Change in
Consumption/ Change in Disposable Income.
Consumption Function is upward sloping with
Disposable income on X-axis and Consumption on
the Y axis (downward sloping in case prices are
taken on Y-axis and consumption on X axis).
 
S
AVING
 
Saving : The act of abstaining from consumption. Some
economists prefer to call it differed consumption. At the
macro level saving is the difference between National
product and the aggregate of individuals’ consumptions
plus payments towards national and international prior
commitments.
As income levels increases the willingness and ability to
save increases
 
S
AVING
 
Marginal Propensity to Save:  Change in savings/ Change
in disposable Income.
Motives for Saving: i) for investing either in physical or
financial assets that yield regular flow of returns-
incomes or services over years. ii) As safety/ cushion
measure to meet unforeseen exigencies. Here the savings
are held in cash or in the form of assets with very high
degree of liquidity or as gold with very low or no flow of
returns
 
I
NVESTMENT
 
Investing refer to the process of creation of Capital
goods, acquiring financial assets, erecting civil
structure, producing machinery, equipments and
gathering inventories.
Though investments in financial assets do not directly
result in creation any physical assets, they do
indirectly facilitate their creation( by entrepreneurs)
and earn a flow of returns.
Similarly inventories are not assets in the strict
sense, but a  requisite during the period of creation of
capital assets.
 
I
NVESTMENT
 F
UNCTION
 
Investment ( Investment spending): the total
amount spent on capital goods during the
reference period.
Cost of Capital: The premium that people would
like to be paid for foregoing their present
consumption and for investing their current
savings in investments. This is usually reflected
in the interests  earned.
Investment Function: Schedule showing the level
of investments and the cost of capital.
If the cost capital is high the entrepreneurs
would have less incentive to take risks and invest
 
 A
CTUAL
 I
NVESTMENT
 
AND
 I
NVESTMENT
D
EMAND
 
Actual investment is the amount actually spent
in the reference period on acquiring new plants,
equipments etc. including inventories thought
required. Investment demand is defined as the
amount required for acquiring capital goods
planned ie. Deemed necessary to carry out the
normal production( business) activities.
 
A
GGREGATE
 S
UPPLY
 
AND
 A
GGREGATE
D
EMAND
 
Aggregate Supply(AS) and Aggregate Demand (AD)
are the two terms coined by Keynes to facilitate his
macro economic analysis Their connotations are as in
the following:
AS: Total of quantities of all goods and services that
producers are willing to supply during  the reference
period. Its value is usually measured in terms the
prevailing market prices.
AD: The total quantity of goods and services willingly
bought by  customers at the given price level during
the reference period. Its value is usually measured in
terms of the prevailing market prices.
AD= C+I+G+T where C, I, G, stand respectively  for
the total value of consumption , investment  items
demanded by individuals, firms, government and  T is
the net inflow of earnings from foreign trade.
 
M
ACRO
 E
CONOMIC
 E
QUILIBRIUM
 
Macro Economic equilibrium is arrived when the
aggregate supply and aggregate demand are
equal to one another.
However in many instances, as observed by
Keynes, the macro economic equilibrium is found
attained at a level much lower than what is
desired for maintaining full employment.
Consequently unemployment is found to persists
for fairly long periods.
 
G
OVERNMENT
 S
PENDING
 
The need for government to intervene in the macro
economic management with large quantum's of
spending has now come to be accepted by all.
But it has to by way of supplementing  private
investments rather than as additions to the private
consumptions. Government investments should be
directed to sectors where the multiplier effects are
high.
 
G
OVERNMENT
 S
PENDING
 
But at the same time it is also necessary to
caliber the newly infused demands in such a way
that they do not lead to inflation .That would be
counter productive.
Investment Multiplier (IM)= changes in national
product/changes in investments
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Consumption in macroeconomics refers to total spending on consumer goods and services, while saving is the act of abstaining from consumption. Investment involves creating capital goods and acquiring financial assets. Engle's Law states that the proportion spent on necessities decreases with income. Marginal Propensity to Save and Marginal Propensity to Consume play crucial roles in economic analysis.


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  1. CONSUMPTION AND INVESTMENT Aditi Arora Assistant Professor

  2. CONSUMPTION In macro economics, the total spending by all individuals, firms, institutions, etc. on consumer goods and services is called consumption. Strictly speaking consumption should apply only to those goods and services that are totally used, enjoyed or eaten up within the reference period. However, the convention is to include under consumption the expenditures on short life consumer durables such as furniture, television etc.(and even automobiles but not houses).

  3. CONSUMPTION FUNCTION Consumption Function is the schedule giving the relationship between consumption and disposable income. Disposable Income: In the case of an individual it is the income left with him after paying taxes and defraying his prior commitments.ie. The portion that he is free to spend on items of his(fresh) choice. But in the case of estimation of Disposable Income at macro level, taxes and other such inter sectoral transfer payments are not taken into reckoning.

  4. ENGLES LAW Engle s law is that the proportion of amount spent on food and other necessities decreases as the level of disposable income increases. Marginal Propensity to Consume: Change in Consumption/ Change in Disposable Income. Consumption Function is upward sloping with Disposable income on X-axis and Consumption on the Y axis (downward sloping in case prices are taken on Y-axis and consumption on X axis).

  5. SAVING Saving : The act of abstaining from consumption. Some economists prefer to call it differed consumption. At the macro level saving is the difference between National product and the aggregate of individuals consumptions plus payments towards national and international prior commitments. As income levels increases the willingness and ability to save increases

  6. SAVING Marginal Propensity to Save: Change in savings/ Change in disposable Income. Motives for Saving: i) for investing either in physical or financial assets that yield regular flow of returns- incomes or services over years. ii) As safety/ cushion measure to meet unforeseen exigencies. Here the savings are held in cash or in the form of assets with very high degree of liquidity or as gold with very low or no flow of returns

  7. INVESTMENT Investing refer to the process of creation of Capital goods, acquiring financial assets, erecting civil structure, producing machinery, equipments and gathering inventories. Though investments in financial assets do not directly result in creation any physical assets, they do indirectly facilitate their creation( by entrepreneurs) and earn a flow of returns. Similarly inventories are not assets in the strict sense, but a requisite during the period of creation of capital assets.

  8. INVESTMENT FUNCTION Investment ( Investment spending): the total amount spent on capital goods during the reference period. Cost of Capital: The premium that people would like to be paid for foregoing their present consumption and for investing their current savings in investments. This is usually reflected in the interests earned. Investment Function: Schedule showing the level of investments and the cost of capital. If the cost capital is high the entrepreneurs would have less incentive to take risks and invest

  9. ACTUAL INVESTMENT AND INVESTMENT DEMAND Actual investment is the amount actually spent in the reference period on acquiring new plants, equipments etc. including inventories thought required. Investment demand is defined as the amount required for acquiring capital goods planned ie. Deemed necessary to carry out the normal production( business) activities.

  10. AGGREGATE SUPPLY AND AGGREGATE DEMAND Aggregate Supply(AS) and Aggregate Demand (AD) are the two terms coined by Keynes to facilitate his macro economic analysis Their connotations are as in the following: AS: Total of quantities of all goods and services that producers are willing to supply during the reference period. Its value is usually measured in terms the prevailing market prices. AD: The total quantity of goods and services willingly bought by customers at the given price level during the reference period. Its value is usually measured in terms of the prevailing market prices. AD= C+I+G+T where C, I, G, stand respectively for the total value of consumption , investment items demanded by individuals, firms, government and T is the net inflow of earnings from foreign trade.

  11. MACRO ECONOMIC EQUILIBRIUM Macro Economic equilibrium is arrived when the aggregate supply and aggregate demand are equal to one another. However in many instances, as observed by Keynes, the macro economic equilibrium is found attained at a level much lower than what is desired for maintaining full employment. Consequently unemployment is found to persists for fairly long periods.

  12. GOVERNMENT SPENDING The need for government to intervene in the macro economic management with large quantum's of spending has now come to be accepted by all. But it has to by way of supplementing private investments rather than as additions to the private consumptions. Government investments should be directed to sectors where the multiplier effects are high.

  13. GOVERNMENT SPENDING But at the same time it is also necessary to caliber the newly infused demands in such a way that they do not lead to inflation .That would be counter productive. Investment Multiplier (IM)= changes in national product/changes in investments

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